Efforts to curb risky lending may not work, says IMF

The International Monetary Fund believes the Australian housing market could be in for a hard landing if efforts to rein in riskier property lending are not sufficiently effective.

The IMF released a country report on Australia last week which considered the risks to the national economy.

“Current efforts to rein in riskier property lending might not be sufficiently effective,” the report said.

“Against a backdrop of already high house prices and household debt, this could give rise to price overshooting and excessive risk taking,” it said. “A sharp correction in house prices, possibly driven by Sydney, could be triggered by external conditions or a domestic shock to employment.”

The IMF noted that a sharper slowdown in China could have significant ramifications for Australian property.

A sharp growth slowdown accompanied by market volatility, and/or a fall in property investment, could lead to a further large fall in demand for Australia’s commodity exports, it said.

“Over half of Australia’s exports go to emerging Asia and nearly two thirds are non-rural commodity exports. An unexpectedly sharp fall in iron ore prices could reduce prices below production costs, and further dent incomes and growth.”

The IMF noted that a slowdown in the Chinese economy “would also likely dent foreign investment in Australian property and other markets, adversely affecting prices”.

However, while the world's second largest economy has experienced significant volatility in recent months, AllianceBernstein is confident there are encouraging signs that Chinese markets are stabilising, pointing to a better year for the country in 2016.

In a recent report titled China’s policies and fundamentals coverage, AllianceBernstein said the growth of the domestic corporate bond market and recovering property fundamentals will contribute to China’s stabilisation.

According to the report, the trend is underpinned by Chinese government policy.

“The strategy is to rebalance the economy so that domestic consumption plays a greater role alongside the traditional growth engines of investment and heavy industry,” said the report.

“This requires a range of reforms to stimulate private investment (foreign and domestic) and more efficient pricing of capital, and the liberalisation of capital markets is a key step in the process.”